Prepaid Finance Charge

DEFINITION of 'Prepaid Finance Charge'

Charges on a loan agreement which are not included as part of the principal amount being borrowed. Prepaid finance charges can include such things as administration fees, loan insurance and discount points. As these expenses are not a part of the "asking amount," they are considered to be prepaid in nature. These expenses typically must be paid by the borrower at the time of loan closing.

BREAKING DOWN 'Prepaid Finance Charge'

Prepaid finance charges, or closing costs as they are also commonly known, are common in lending agreements, including mortgage borrowing. While not directly incorporated in the cost of borrowing calculation for a loan, these expenses do affect the APR, as upfront fees should be included in the total cost of borrowing statement given to borrowers at loan signing, as is stated in Truth In Lending documentation.

RELATED TERMS
  1. Amount Financed

    The actual amount of credit made available to a borrower in a ...
  2. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of ...
  3. Prepaid Interest

    The interest that a debtor pays before the first scheduled debt ...
  4. Interest Cost

    The cumulative sum of the amount of interest paid on a loan by ...
  5. True Interest Cost - TIC

    The real cost of taking out a loan. True interest cost includes ...
  6. Prepaid Insurance

    Payments that are made in advance for insurance services or coverage. ...
Related Articles
  1. Personal Finance

    How To Read Loan And Credit Card Agreements

    The devil is always in the details! Find out what you're signing yourself up for.
  2. Investing

    What are Prepaid Expenses?

    A prepaid expense is an asset on the balance sheet. Due to accounting principles, expenses are often accrued on the balance sheet and expensed in a later period.
  3. Personal Finance

    8 Top Alternatives to Car Title Loans

    Before you sign up for a car title loan, investigate these 8 alternate strategies.
  4. Financial Advisor

    Personal Loans: Consider These Alternative Lenders

    Looking for an alternative source of financing for a personal loan? Take a look at these companies.
  5. Investing

    Different Needs, Different Loans

    Find out what options are available when it comes to borrowing money.
  6. Markets

    Simple Interest

    Simple interest is a quick method of calculating the interest charged on a loan. Simple interest is determined by multiplying the interest rate by the principal by the number of periods.
  7. Markets

    Small Business Loan Vs Line of Credit: How They Differ

    Understand the differences between a small business loan and a line of credit, and learn some of the most appropriate uses for each form of financing.
  8. Personal Finance

    Mortgage Basics: Costs

    By Lisa SmithPeople generally think about a mortgage in terms of the monthly payment. While that payment represents the amount of money needed each month to cover the debt on the property, the ...
  9. Personal Finance

    Understanding Loans

    A loan is the act of giving money, property or other material goods to another party with the expectation of being repaid.
  10. Retirement

    The Best Way To Borrow

    There are many avenues from which to drum up funding. Find out the pros and cons of each.
RELATED FAQS
  1. Does working capital include prepaid expenses?

    Discover how prepaid expenses can be classified as short-term assets included in the calculations for determining working ... Read Answer >>
  2. Who benefits the most from prepaid expenses?

    Learn who benefits most when expenses are prepaid. Individuals and businesses often make payments, such as rent or insurance, ... Read Answer >>
  3. What are the differences between deferred expenses and prepaid expenses?

    Learn the difference between prepaid expense and deferred expense and how businesses use and record each in standard accounting ... Read Answer >>
  4. How are prepaid expenses recorded on an income statement?

    Understand how prepaid expenses are recorded on a company's financial statements. Learn why a prepaid expense would be considered ... Read Answer >>
  5. Do prepayments provide working capital?

    Learn how prepayments for various services such as insurance, rent and supplies are included as part of a company's current ... Read Answer >>
  6. What transactions cannot be made using prepaid credit cards?

    Find out about the transactions that are restricted when you use a prepaid credit card, and find out about other ways to ... Read Answer >>
Trading Center